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This publication is available at https://www.gov.uk/government/publications/income-tax-averaging-rules-for-farmers/income-tax-averaging-rules-for-farmers

Who is likely to be affected

Individuals who are eligible to average their business profits for income tax purposes under the averaging rules for farmers and creative artists.

General description of the measure

The measure will enable an individual who carries on a qualifying trade of farming, market gardening or the intensive rearing of livestock or fish, to average their profits over five years for income tax purposes. They will continue to have the option to average over two years.

The legislation will also simplify the rules for farmers and creative artists who can benefit from two-year averaging, by removing marginal relief.

Policy objective

This measure supports the government’s objective of encouraging a more efficient, productive and resilient agricultural industry in the UK. These changes ensures the tax system continues to support farmers with fluctuating profits.

Background to the measure

At March Budget 2015 the government announced that it would extend the period for which self-employed farmers can average their profits for income tax purposes from two years to five years.

At Summer Budget 2015, HM Revenue and Customs (HMRC) published a consultation seeking views on how the extension could be designed and implemented. This consultation closed on 7 September 2015.

Detailed proposal

Operative date

The measure will have effect for averaging claims made for 2016 to 2017 and subsequent tax years.

Current law

Chapter 16 of Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) contains the rules that provide for the averaging of profits of farmers and creative artists over two consecutive years. Paragraph 3 of Schedule 1B of the Taxes Management Act 1970 provides further rules on how a claim is given effect.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to amend Chapter 16 of Part 2 of ITTOIA. This will enable an individual carrying on a qualifying farming trade, profession or vocation, either alone or in partnership, to claim averaging for a period of five consecutive years. For these purposes the definition of a qualifying trade does not include where the taxpayer’s profits are derived from creative works.

The legislation will also simplify the rules for farmers and creative artists who can benefit from two-year averaging, by removing marginal relief so that full averaging relief will be available where the profits of one year are 75% or less of the profits of the other year.

Summary of impacts

Exchequer impact (£m)

2015 to 2016

2016 to 2017

2017 to 2018

2018 to 2019

2019 to 2020

-

-10

-30

-30

-30

These figures are set out in Table 2.1 of March Budget 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside March Budget 2015.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Eligible individuals choosing not to average their profits under the current system may alter their behaviour, electing to average profits over five years if there is an observed tax benefit.

Impact on individuals, households and families

The measure is not expected to impact on individuals, households, family formation, stability or breakdown.

Equalities impacts

It is not anticipated that this measure will have a detrimental impact on individuals with particular protected characteristics.

Impact on business including civil society organisations

The extension of the averaging period for farmers to five years is expected to increase the number of businesses who are able to use averaging to reduce their overall income tax liability.

There will be negligible one-off costs associated with understanding these changes. The on-going burden is expected to increase for businesses who want to take advantage of the extension of the averaging period. These businesses will need to assess whether averaging applies to them and whether it is advantageous. The increased administrative burden due to the change in averaging period will be partially offset by the removal of marginal relief. The additional burden is expected to be between £700,000 and £1.9 million.

This measure is expected to have no impact on civil society organisations.

Estimated one-off impact on administrative burden (£m)

One-off impact

(£m)

Costs

Negligible

Savings

-

Estimated ongoing impact on administrative burden (£m)

Ongoing average annual impact

(£m)

Costs

0.7 to 1.9

Savings

Negligible

Net impact on annual administrative burden

+0.7 to +1.9

Operational impact (£m) (HMRC or other)

It is not anticipated that HMRC will incur any significant additional costs in implementing this measure.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns.